Stocks Don’t Truly Discover Price, Bitcoin Fixes This

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” 

Phillip Fisher

Bitcoin could care less about its vertical positioning on a chart. But, as emotional monkeys with too much brain for our own good, we get attached to the movements of price. Up and down, back and forth, oscillating like many naturally occurring phenomena, price is supposed to be an equilibrium.

As we have gotten used to utilizing equities, real estate and other assets for storage of value, we have begun to necessitate that they must go up in price. Indeed, if we begin to use stocks to store value, therein lies an attachment to maintaining the price of a stock. Imagine that an investor owns a large amount of stock. That amount is acquired at a certain price, and they now have a vested interest in keeping the price of that security above the purchasing price, regardless of their belief in the company itself.

True Price Discovery Is Scary

Stocks haven’t been allowed to legitimately discover price. Many factors make this true. In this article, I focus on the underlying psychological mechanisms which influence people to hang on to securities they know they don’t believe in. This is a roundabout way of stating price discovery is hampered. 

A true store of value is necessary for an economy. Without it, capital begins to be allocated in unnecessary pools — real estate, the stock market, failing businesses. These pools then have self-interested investors protecting their nominal value. Again, the price discovery of hard money, unleashed, will be scary. The reason investors protect the price of these assets is for wealth storage — but Bitcoin makes these forms of wealth storage dated, and highlights their flaws.

Although hedge fund managers and desk traders excitedly welcome volatility, many investors still liken it to the devil. Volatility, in their eyes, is the potential for loss. Widening one’s vision of the market, however, can change the way one sees volatility. By envisioning time on a scale beyond that of market cycles and economic quarters, we can see that a store of value’s price discovery is a long-term operation.

Gold has always been worth gold, but the dollar-denominated value has changed dramatically. Anyone living in the past would be startled at the “price” of gold today.

For hard monies, price isn’t a reflection of its value (like stocks) but a measure of the denominating currency’s value against the hard money.

How inflated is your currency? You can find out by looking at the price of bitcoin denominated in that currency. It can be a difficult concept to wrap the mind around. Traditionally, we say that an object (like a car) is worth $X amount. “Worth,” meaning this is the value we apply to this object. “Value,” meaning the amount of resources (time) we are willing to give up for some other good or service. In economics (simplified), it is a measure of benefit. But with Bitcoin, $X amount is a measure of the value of the currency denominator, USD. It could be the euro or the yen. With hard monies, we flip our traditional understanding of value; rather than the fiat currency representing the perceived value, the hard money does.

Again, it is tricky to wrap the mind around. Let’s take bitcoin at $35,000. Rather than assuming Bitcoin (the protocol) has a value of $35,000, what we are witnessing is a valuation of 35,000 U.S. dollars at one bitcoin.

Separate The Bitcoin Protocol And The Bitcoin Currency

When a stock is valued, the “price” of the stock is supposed to be a valuation of the company at large. Now, the number attached to the price can depend on the issuance of stock and things like stock splitting. But this is the general concept.

With Bitcoin, we have to separate the valuation of other hard currencies via bitcoin/currency pairs, and the valuation of the Bitcoin protocol. Some bitcoin/currency pairs are at all-time highs — quite literally, in these places in the world, bitcoin are “worth” more. But the total market capitalization in dollar terms is still quite expressible. We can simply do the transactions of the other fiats into USD, and find the total wealth stored in Bitcoin. This, here, is the valuation of the Bitcoin protocol.

As meaningless as it may sound, reversing your perception of Bitcoin valuation makes all the difference.

Going back to the first few paragraphs, I described how investors traditionally protect the nominal value of their wealth-storage assets. This is in part because they have no true hard money to store value in, and as such must create pools of wealth atypical to storing value over time. When we flip our understanding of Bitcoin valuation, however, we can see an end to this.

Assets measured against bitcoins are going to endure straight price discovery. There are no psychological games here – because everyone trusts Bitcoin to store their value, they can now evaluate non-store of value assets properly. Without an incentive to maintain the value of stocks, real estate and other poor choices of storing wealth, the world can be reevaluated to proper prices.

Traditionally people value assets based on the benefits they give — either cash flow, equity growth or some other benefit found through economic analysis. But the value of things in bitcoin is different. When we begin to value things in bitcoin, we can find their legitimate value, as bitcoin is the most legitimately-valued money. There are no manipulations of supply, or buybacks, or quantitative easing or laws protecting value — only direct valuation.

What we are unlocking, here, is a medium upon which humans can draw their ideas of benefit. Never before have we had an unhampered monetary paradigm with which we can interact without fear of human emotion, greed or idealism in the way. This type of money cannot be understated in its importance — valuation in money is the cornerstone upon which we build our ideas of the world and what has value in it.

Money is a medium like speech. Much like speech allows us to express thought, money allows us to express our idea of value. There have been periods of history within which money has been allowed to flourish independent of influence. These periods are merely predecessors to the Bitcoin age. What we will experience, is simply unpredictable. But the idea of Bitcoin itself, free money, sovereign money, has been unleashed upon the world. And, coincidentally, it came about alongside the internet, the interconnecting paradigm shift that has made instant communication across the world accessible to everyone.

The unstoppable nature of Bitcoin the protocol may very well lend itself to bitcoin the currency’s unstoppable ascending price. Only time will tell.

This is a guest post by Casey. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.


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